Legg Mason Manager Heads for Hedge-Fund World

The brain drain in the mutual fund industry continues, as Lisa Rapuano moves to Matador Capital.

One of the brightest stars in Legg Mason's ( LM) stable of fund managers has moved on to the greener pastures of the hedge-fund world.

Lisa Rapuano has left the firm to become partner and chief investment officer at Matador Capital, a St. Petersburg, Fla.-based hedge fund, according to a person familiar with the matter. The 38-year-old Rapuano managed the ( LMASX) Legg Mason Special Investment fund -- and her savvy work as a tech analyst in the 1990s helped stable mate Bill Miller find winning bets such as America Online and Amazon.com ( AMZN) for his ( LMVTX) Legg Mason Value Trust fund.

The departure of Rapuano, who was also Legg Mason's director of research, continues the brain drain of high-profile money managers away from mutual funds and toward hedge funds -- Fidelity, Oakmark, Franklin and a host of other firms has witnessed similar high-profile defections.

Rapuano's move marks a significant loss for Legg Mason. The skipper has notched impressive returns at the $3.39 billion-in-assets Legg Mason Special Investment fund, which she has managed solely since January 2001 -- she was co-manager with Miller the previous three years. The mid-cap fund returned 50.2% in 2003, and its three-year average annual return of 13.66% ranks the fund in the top 10% of all mid-cap blend funds, according to Morningstar.

Rapuano also earned her stripes at Legg Mason as the right-hand woman to Miller, whose investments in technology -- bold, unorthodox ventures for a value fund -- have helped the Legg Mason Value Trust fund beat the S&P 500 for 13 straight years.

Legg Mason's loss is a big win for Matador Capital, whose clients include Calpers, the massive pension plan for California state employees. The long-and-short hedge-fund firm is known for its stock-picking prowess in the micro-cap, small-cap and mid-cap arena, opting for reasonably valued growers that generate lots of cash flow. Rapuano's skills should complement the firm's strategy nicely.

Indeed, Rapuano and Matador are simpatico on several stocks: Some of the firm's bigger bets, such as career-education company DeVry ( DV) and waste-management firm Republic Services ( RSG), turn up in Rapuano's fund.

Mutual fund firms have had a hard time retaining top talent as hedge funds continue to pluck the best skippers from the mutual fund ranks. Because hedge fund managers receive a fee based on the amount of assets under management plus a substantial percentage of positive returns, the annual salary can range in the seven- and eight-figure territory. Fund managers, meanwhile, typically make about $500,000 to $750,000 a year -- although some stars command seven-figure annual salaries.

TheStreet.com contacted Cromwell Partners, a New York executive recruiter that conducted the search for Matador. Michael Martinolich, a partner at Cromwell, declined to discuss the specifics of the search.